Syndicated loans in shrink mode

Dhaka,  Wed,  28 June 2017
Published : 10 Mar 2017, 23:59:43 | Updated : 11 Mar 2017, 09:22:39
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Syndicated loans shrink as large projects become scarce

Sponsors prefer foreign-source funding
Jasim Udin Haroon


The volume of syndicated loans fell significantly in recent years mainly due to lack of large projects in the private sector.

This highlights one unwanted development that financial institutions are gradually losing the good mode of financing.

People, familiar with the development in banks and financial institutions, told the FE that syndicated loans fell both by number and volume. The syndicated loans amounted to Tk 102.51 billion in 2015, Tk 98.34 billion in 2014 and Tk 1,218.86 billion in 2013, the highest amount recorded.

The amount was Tk 53.07 billion up to June in 2016 and the data for remaining six months of that year could not be found.   

Relevant officials said many private parties are now sourcing funds from foreign sources thus contributing to such shrinkage in syndicated loans which require well documentation and usually consumes more time.

A research study, conducted by the Bangladesh Institute of Bank Management (BIBM), showed that the percentage of bad syndicated loans is less than 1.0 per cent whereas non-performing loans in overall lending are over 10 per cent.

Helal Ahmed Chowdhury, a former managing director of the Pubali Bank, told the FE that the main motivation of loan syndication is to spread and share the credit risks among all the participating banks.

He said, "The loans usually follow better management, better supervision and scrutiny."

He said many countries like Singapore, Malaysia, Korea and even Indonesia resorted to such type of financing for big projects contributing to their economies significantly.

Loan syndication is a widely used structured finance product offered by banks and non-bank financial institutions for providing financial support to finance large projects.

Syndicated loans involve deals where a group of two or more lenders extend credit to a borrower, governed by one loan contract.

The loan usually is of longer maturity period and so far banks and non-bank financial institutions funded Tk 765.29 billion in more than 20 years up to June 2016 to nearly 400 projects, mostly in power and energy as well as telecom sectors.

Banks funded sectors such as textile, steel, cement, food, ceramic, real estate, IT, infrastructure etc.

However, a number of top executives in commercial banks told the FE last week that the banks' capacity has  expanded over the years and many now offer single exposure instead of involvement of many financial institutions resulting in difficulties in reaching a consensus over a project.

Anis A. Khan, managing director and CEO of the Mutual Trust Bank said banks' capacity has been widened and many banks handle big loans singly.

Mr Khan, also chairman of the Association of Bankers Bangladesh, said the number of power projects also dropped in recent years.

Golam Hafiz Ahmed, managing director and CEO of the National Credit and Commerce Bank noted that a 'bad culture' in the financial institutions has started through aggressive lending by many.

"There are many risk factors for such type of single disbursement although borrowers prefer single lending entity to avoid cumbersome process of documentation and other complexities.

Some senior bankers argue that this type of loan should be widened in many unexplored areas considering the interest of parties and financial institutions.

Md Touhidul Alam Khan, deputy managing director and chief business officer of the privately-owned Prime Bank said there is no effective practice of syndicated loan in firms' working capital.

"To my view, this should be introduced immediately to benefit both banks and clients."

He noted that there are now unorganised syndicated loans for working capital which, he says, lead to many unethical practices including over-financing among borrowers, among others.

He said there is also a psychological aspect of syndicated loans. "If the parties repay installments of syndicated loans in time, they earn goodwill in the banking industry. This  ultimately widens scope for further loans."

He also opined that big investors are not coming as before due to lack of infrastructure facilities, gas connection and for various other reasons. As a result, the demand for syndicated loan has now been slightly reduced.

He also said, due to increase of capital under BASEL III framework, banks, in some cases, are financing big amounts under the single borrower exposure limit though Bangladesh Bank always asks for diversification of risks through syndicated loan in case of a large loan.

Md Ruhul Amin, a faculty at the central bank-controlled BIBM, who dealt with the research, told the FE Thursday that cumbersome and lengthy process discourages good borrowers to raise a large amount of funds from the domestic market through syndication.

He also said after issuing drawdown notice by the lead bank under the facility agreement, some participating lenders do not act as per notice with regard to providing fund. This also works as a barrier, apart from lacking skilled manpower to handle such type of loans.

In the backdrop of imposing single borrower exposure limit by the central bank and considering the issues like risk sharing, diversification of credit portfolio, meeting large financing need, as well as providing innovative financial solution to clients, banks and NBFIs started loan syndication in Bangladesh in the 90s.

    jasimharoon@yahoo.com
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